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Do you find that weird?


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http://money.cnn.com/2009/08/13/markets/bondcenter/bonds/index.htm?postversion=2009081317

 

The bid to cover ratio was 2.54 this time around compared to a long term average of 2.25. Every treasury auction this year appears strong while the amounts issued are unprecedented. There is no shortage of buyers every time and no sign or trend that they are getting full. I know about the Fed quantitative easing program, but it can explain it all. Who are the buyers and why are they so eager to buy?

 

To give you some perspective, Taleb mentioned on CNBC this week that following 911, that it took only $50 billion in stock sales to bring the market down by 12% on re-opening. That is how little it takes to move a market. The treasury is issuing multiple baggers of that in debt and it is swallowed like it enters a black hole.

 

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"Borrow short at 1%, buy long at 5%.  Buy a hedge or a swap if you're nervous.  Profit."

 

Makes sense especially for agressive hedge funds. If the trade goes kaput, the general partner is organized under a corporation so the managers or individuals are protected from personal liability. For those who protect themselves and their clients with hedges, the question is who is the hedger assuming the risk? The music could stop at some point.

 

The problem that I have is the sheer size of these treasury issues. We are talking $2 trillion in supply for this year alone. For comparison, the U.S. money market is $3.6 trillion in size and there is something like $1.5 trillion in hedge funds. Such supply should create some kind of dislocation, especially since it will continue in future years. It is not a one time event. It is true that prices for bonds have declined since December, but I am surprised how big the appetite is for them.

 

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